A yard in Gascoyne, N.D., which has hundreds of kilometres of pipes stacked inside it that are supposed to go into the Keystone XL pipeline on April 22.Alex Panetta/The Canadian Press
Can you handle a dividend growth stock with a sinking share price?
That's TransCanada Corp. for you. The company's shares are down about 25 per cent this year as a result of U.S. President Barack Obama's rejection of the Keystone XL pipeline. Meanwhile, management says the company is extending its plan to increase dividends by 8 to 10 per cent annually through 2020. The initial plan, announced in 2014, was for this dividend growth rate to apply through 2017.
Income seekers, listen up. With inflation trending in the 1 to 2 per cent range, TransCanada gives you a rare opportunity to build a flow of income that puts you well ahead of the cost of living. A preview of what to expect: TransCanada earlier this year raised its quarterly cash payout to 52 cents a share from 48 per cent, or 8.3 per cent.
Two important questions have to be answered before you bite, the first being the potential for TransCanada to fall short of its dividend growth plan. This seems unlikely, given that the company has been so public about its intentions. Remember, this is a company that stunned investors in 1999 when it cut its dividend by almost one-third. Another dividend disappointment would be an epic failure for a utility-type stock.
The other question is whether you're mentally prepared to receive a rising flow of dividends from a stock that has been notably weak at a time when other blue chip dividend payers have flourished. The company's shares reached a 52-week high of $59.50 in February and traded in mid-November in the mid-$42 range. That's good for a dividend yield of 4.9 per cent, which is high for a dividend growth stock.
Let's canvas around for some opinions on prospects for TransCanada shares. Globeinvestor.com says the consensus analyst recommendation is a not especially enthusiastic "buy." Standard & Poor's gives it four out of five stars and rates it a "buy" with a 12-month target price of $36 (U.S.). A quantitative equity report Morningstar estimates the stock has a fair value of $34.49 (U.S.).
It might be an opportune time to buy TransCanada because it's undervalued, but that's speculative. What you can count on is management's publicly stated commitment to strong dividend growth for the rest of the decade. If you can handle the risk of a sinking share price, this dividend growth stock is worth a look.
Disclosure note: I own TransCanada shares. I bought them in 1999, after the dividend cut.
Rob Carrick